Hearing on Bankruptcy Reform and Financial Services Issues

9:30 a.m., Thursday, March 25, 1999

Good morning, Chairman Gramm and other members of the Committee. I am Terry
McCormick, President of Plains Bell Federal Credit Union in Amarillo, Texas, and I appreciate
the opportunity to be here to tell you about our concerns with the increasing number of
bankruptcies and how this is impacting credit unions -- and my credit union in particular. I am
speaking on behalf of the Credit Union National Association (CUNA), which represents over
11,000 state and federal credit unions nationwide. We are very pleased that this committee is
holding hearings today on financial services issues related to bankruptcy reform.

Plains Bell is a $17.7 million federally-chartered and insured credit union. Its 5,500 members are
primarily workers and families of Southwestern Bell Telephone, AT&T, and rural electric and
telephone co-ops in Texas, New Mexico, and Arizona. In 1998, we made about $14 million in
loans to our members ­that's over $10 million in car loans and over $2.5 million in unsecured
signature loans. We have issued about 1,000 credit cards for another $1 million.

Nationwide bankruptcy filings exceeded 1.4 million in 1998, which was a 2.7 percent increase
from the 1997 filings. In fact, bankruptcy filings have set records in 1996, 1997, and 1998. And
it is not anticipated that there will be a decrease to these high numbers for 1999. Consumer
bankruptcy filings made up 96.9 percent of those 1998 filings. Credit unions are quite concerned
about this steady increase in bankruptcy filings nationwide in the last few years because they
have seen a similar increase in the number of credit union members who file. Preliminary data
from credit union call reports to the National Credit Union Administration (NCUA) show that
credit unions had approximately 253,000 filings in 1998, which is an increase from the 250,000
filings in 1997. The 1997 figures were an increase of 20 percent over 1996 levels, and the 1996
filings were 35 percent higher than the 1995 figures. CUNA estimates that almost half of all
credit union losses in 1998 were bankruptcy-related and that those losses reached $684 million.

In Texas, credit unions are experiencing record highs in bankruptcy filings --they have doubled in
the last five years, with the 1998 total topping 16,800. Since 1994 the annual increases for
bankruptcy filings at credit unions have averaged 15 percent with the increase most pronounced
in chapter 7 filings. Chapter 13 filings have grown 83 percent since 1993, but chapter 7 filings
have jumped 122 percent during that period.

At Plains Bell, bankruptcy filings and losses have shown a steady increase since 1995. In 1995,
we had 8 members who filed for bankruptcy, in 1996 the filings jumped to 13, in 1997 there was
a dip to 11, and they hit 18 in 1998. A majority of our bankruptcies are chapter 7, which cause
the greatest loss to the credit union.

As the number of member bankruptcies has increased, so too have the losses to the credit union.
Our losses from 1995 to 1998 due to charge-offs were $177,592; the losses due to bankruptcy
were almost $60,000, which represents about 33 percent of our total loan losses. Our losses due
to bankruptcy have been less because of the reaffirmations. The information on the number of
bankruptcy filings and on the losses to the credit union is attached to my testimony.

Plains Bell is a careful lender. We cannot afford to be otherwise. We do a good job with
scrutinizing loan applications and carefully determining that the applicant is creditworthy before
extending credit. We examine credit reports, verify income, and see that a reasonable debt-to-income ratio is maintained by the borrower. We even look at the applicant=s disposable income
to determine that the applicant can make the payments. We routinely monitor our credit cards,
and although we do not automatically make any across the board increases to the credit limit, we
may make a $500 increase to the line of credit for a member whose credit is good. However, the
maximum limit on all lines of credit is $5,000. Students can apply for a credit card, but we often
encourage a co-signer and set the credit limit at from $300-$500 in most cases.

In an effort to combat the number of bankruptcies at the credit union, Plains Bell has tightened its
credit policies. As I said, we do annual reviews of our signature lines of credit, and during our
annual review in 1998 we carefully did not reissue the cards to certain members. After making a
check of credit reports, we did not reissue cards to those members who were overextended or had
a poor repayment history with the credit union.

If a member is experiencing financial problems, we try to help. When a member applies for a
loan and we see that the member is carrying too much debt to qualify for the loan, we turn down
the loan, and then sit down with the member to discuss the problem and work with them to
improve their financial situation. We advise the member how to budget and correct excessive
expenses. If the member's credit report has an error, we recommend that it be cleared up. In
some cases we recommend that the member go to the local Consumer Credit Counseling Service
(CCCS) for additional assistance.

It is difficult to pinpoint the reasons for the dramatic increases in bankruptcy. About the only
thing that is clear is that there are many factors contributing to the increase, such as the loss of
stigma, an elevated acceptance of a culture of debt accumulation, divorce, job loss, medical
emergencies, and the ever-increasing cause of gambling. For credit unions, and all financial
institutions, the increasing number of bankruptcies has led to greater losses, which in turn, has an
effect on their bottom line and services. A certain amount of loan losses, either through regular
charge-offs or bankruptcy, is a normal cost of doing business. However, to the extent some
bankruptcies are filed by borrowers who could repay some or all of the discharged debt, someone
else has to pay for those losses.

For credit unions, excessive bankruptcy losses result in a transfer of benefits from some members
to others. The members receiving the additional benefit are of course those that have some of
their loans discharged that they could actually pay. Those paying for this benefit are the
membership as a whole, and borrowing members in particular. To the extent a credit union
incurs excess bankruptcy losses, the general membership suffers reduced dividends on shares.
Borrowing members pay for bankruptcy losses in two additional ways, because credit unions will
respond to rising bankruptcy losses in two ways. First, credit unions are likely to raise rates on
loans, especially unsecured loans. All borrowers thus pay for the benefit of the few. Second,
credit unions are also likely to tighten credit-granting standards, again especially on unsecured
loans. Thus, some members will have access to credit denied, or receive less credit than they
otherwise would have, as a result of excess bankruptcy losses.

Credit Unions Support Financial Education

While we do not know the exact causes for the increase in bankruptcy filings, what does appear
obvious to us is that over the long term, financial education is a key to curtailing the use of
bankruptcy as a financial planning tool. Credit unions clearly recognize the value of financial
counseling for their members. According to a recent CUNA bankruptcy survey, 70 percent of
credit unions counsel financially troubled members at the credit union. A similar percentage of
credit unions may also refer members to an outside financial counseling organization, such as the
Consumer Credit Counseling Service (CCCS), and many do both. At Plains Bell, we refer those
members who are experiencing financial difficulties to the local CCCS and have found that
beneficial for the members and their families. We also try to educate our members about
alternatives to bankruptcy and how to improve their credit. We offer credit counseling to all our
members at any time and encourage them to come to the credit union for help if they are
experiencing financial difficulties. We tell the members about this service in our newsletter and
other publications.

However, even with financial counseling, we certainly recognize that there are some instances in
which bankruptcy may be the only alternative for members, the way for them to get the needed
"fresh start." But even for those who need to file for bankruptcy, financial counseling is still
very beneficial in helping them to learn of ways to repair their financial standing and avoid future
financial difficulties.

Credit unions want to help their members avoid financial difficulty through learning to manage
their credit. We believe that more emphasis should be placed on consumer financial education so
people can learn how to manage credit and what the alternatives to bankruptcy are. The CUNA
Bankruptcy Subcommittee recently reported that "[e] ducation was found as one of the most
promising strategies to consider in attempting to reverse the trends in bankruptcy." Credit
unions have found that educating their members about credit and how to use it can be an
effective deterrent to filing for bankruptcy.

Therefore, CUNA strongly supports the provisions in S 625 and HR 833, bankruptcy reform
bills, that require the debtor to receive credit counseling prior to filing for bankruptcy and
prohibits the chapter 7 or 13 debtor from receiving a discharge if the debtor does not complete a
course in personal financial responsibility. Recognizing that consumers need to know more
about alternatives to bankruptcy so they can make a more informed decision, we also support the
provisions that require a consumer debtor to be given a notice about bankruptcy and a description
of services from trustee-approved credit counseling services. Any sensible bankruptcy reform
should include education provisions to give debtors the tools they need to make wise decisions
about filing for bankruptcy and to succeed financially after bankruptcy.

In addition, credit unions recognize that financial education needs to be made available early on
and before consumers experience financial problems. We support the Sense of Congress
provision in the bills that each of the states should develop curriculum on personal finance for
elementary and secondary schools. Credit unions are currently going into their local schools and
teaching students about money management. In addition, the National Youth Involvement Board
(NYIB), a national network of credit union volunteer professionals, helps credit unions to
educate young members. During the 1997-1998 school year more than 5,000 credit union
speakers visited classrooms across the country, and as a result, more than 110,000 students heard
about the wise use of credit, savings options, budgeting, and careers.

Many credit unions also devote office space for consumer libraries that enable members to use a
wide range of financial periodicals, manuals, and books to learn more about money management
and to research buying decisions, retirement plans, and a host of other issues relating to personal
finance. And, through various new initiatives, CUNA is developing an even more aggressive
strategy to promote consumer financial education.

Credit Unions Support Reaffirmations as a Benefit Both to the Member and to the Credit
Union

Because we are a not-for profit cooperative financial institution, losses to the credit union have a
direct impact on the entire membership due to a potential increase to loan rates or decrease in
interest on savings accounts. We have a policy that if a member causes a loss to the credit union,
services to that member, aside from maintaining a share account, will be withheld. Most credit
union members take this seriously and continue to reaffirm on their credit union loans. However,
we are beginning to see that some members do not care if they cause a loss and are denied service
because they believe they can get it elsewhere --even though it may be at a higher rate. We
continue to see more surprise bankruptcies, where the member is a long-time member and is
current on his or her debt at the time the bankruptcy petition is received.

Credit unions believe that reaffirmations are a benefit both to the credit union, which does not
suffer a loss, and to the member, who by reaffirming with the credit union continues to have
access to financial services and to reasonably priced credit. We are aware of concerns of abusive
creditor practices, recently highlighted in high profile press coverage, but note that the current
Bankruptcy Code, in fact, caught the violators. The size of the penalties imposed will
undoubtedly act as a deterrent to others. The ability of credit unions to enter into reaffirmation
agreements with their members is critically important. For example, at Plains Bell, 13 of 50
bankruptcies from 1995-1998, or 26 percent of all bankruptcies, have reaffirmed. These
reaffirmations have resulted in recoveries that would have exceeded recoveries from chapter 7
cases that might have converted to chapter 13 cases. Because credit unions devote so much
energy to working with and educating their members, our experience is common among most
credit unions. Therefore, if reaffirmations were severely limited or made not usable, CUNA
would strongly oppose bankruptcy reform legislation regardless of what the rest of the bill might
contain.

As I said, reaffirmations are very important to credit unions, and they can be vital to the credit
union member. For example, one member was encouraged by a bankruptcy attorney to file
chapter 7 and was so misinformed by the attorney that the member thought his credit would not
be impaired. The member then came to the credit union to get a loan and was told about the
credit union's policy of denying services if the credit union suffers a financial loss. Because the
member wanted to retain his access to financial services at the credit union and to reasonable
credit, the member reaffirmed his debt with the credit union. Since the reaffirmation, the credit
union has made additional loans to the member --at the same rate as loans to other members, and
he has repaid those loans.

Credit Unions Support Needs-Based Bankruptcy

Credit unions are very anxious to see Congress enact meaningful bankruptcy reform and believe
that "needs-based bankruptcy" presents the best opportunity to achieve this important public
policy goal. Credit unions believe that consumers who have the ability to repay all or some part
of their debts should be required to file a chapter 13, rather than have all their debt erased in
chapter 7. While CUNA supports the needs-based provision that is contained in H.R. 833, it is
still reviewing the approach taken in S. 625.

Because these provisions play an integral part to needs-based bankruptcy, we support the
provision in both the House and Senate bills that required the debtor to provide accurate
schedules with tax returns, pay stubs, and other proof of income. In addition, we support the
random audit provision which would ensure that the debtor does provide accurate documentation
of income and thus, those who can repay some part of their debts would be required to do so.

Again, let me say that I am pleased you are holding this hearing today. Credit unions are very
anxious to see Congress enact meaningful bankruptcy reform and believe that a needs-based
bankruptcy program represents the best opportunity to achieve this important public policy goal.
The 105th Congress strongly supported needs-based bankruptcy, and CUNA supported these
efforts. This hearing shows that the 106th Congress is continuing to move toward passage of
bankruptcy reform legislation. We encourage members of the Senate Banking Committee to
push for passage of this reform as soon as possible.

Thank you for the opportunity to testify today before the committee on CUNA's concern with
financial services issues related to bankruptcy reform legislation.